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Ind-Ra: Subsidy clearance a game changer for fertiliser cos, outlook upped to “positive”


The government’s move to clear the subsidy backlog is a game changer for the fertiliser industry, India Ratings and Research said on Monday, revising up the sector’s outlook to “positive” in FY22 from “stable”. (original) Earlier, the central government had allocated an additional Rs 62,600 crore fertiliser subsidy in the revised budget estimate for FY21, the rating agency noted.

“This is likely to clear the sector’s entire subsidy backlog and free-up significant working capital funds,” India Ratings and Research said in a note.

Additionally, fertiliser demand is likely to remain healthy in view of the Union government’s focus to increase farmer income and the sector companies’ moderate capex plans, it said.

The fertiliser sector witnessed a 10 per cent increase in sales during April-February in FY21 as compared to the same period a year ago, led by higher availability of funds with farmers due to the various policy measures in the wake of the COVID-19 pandemic, higher sowing and acreage, early arrival of monsoon and better labour availability owing to labour migration to rural areas, it said.

The change in outlook is driven by expectations of a meaningful improvement in credit metrics owing to the additional cash inflows of pending subsidy receivables and the consequent reduction in working capital debt, it said.

The rating outlook would encourage the industry to take measures to further improve their operating efficiencies, it added.

A majority of the fertiliser entities it rates have already witnessed a meaningful reduction in their subsidy receivables and working capital debt levels during H2FY21 which is likely to continue in FY22 as well, the agency said.

The agency said it expects positive rating movements in the fertiliser sector during FY22, and added that no COVID-19 related rating actions were taken during FY21.

From a profitability perspective, it said operating margins for fertiliser companies will continue to remain comfortable in FY22 after the recovery seen in FY21.

However, the recent spike in international prices of key raw materials like phosphoric acid, rock phosphate, ammonia, coupled with higher natural gas prices could marginally suppress the profitability of NPK manufacturers during FY22, given the limited ability to fully pass on the price increase to farmers, it said.

A rise in the pooled gas price coupled with stricter energy efficiency norms during FY22 could also reduce the savings as well as increase working capital requirements, and in essence lead to higher borrowing and interest costs, it said.

The clearance of subsidy backlogs and reduction in working capital requirements will be more than sufficient to compensate for the factors which will put pressure on the margins, it added.

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